Recently I met with one of my clients who has been struggling with passing their business to the next generation. Every family business faces similar challenges when they attempt to “pass the torch” to the next generation. The technical term for passing the torch is “Succession Planning”.
In this post, we will discuss some of the family business succession issues that you should be aware of.
In the March 2011 issue of Trust and Estates Magazine an article written by David Thane Leibell entitled, Succession Planning provided some interesting statistics.
- Approximately 90 percent of U.S. businesses are family owned
- There are more than 17 million family businesses in the U.S., representing 64% of the GDP
- Thirty-five percent of the business that make up the S&P 500 are family controlled
- 30% of family businesses survive into the second generation though 80% would like to keep the business in the family
- 12% of family businesses survive to the third generation
- 3% of family businesses survive to the fourth generation
Over the years as I have assisted clients with this transition, I have made the following list of the challenges most businesses encounter:
- Business founders have no clear goals for business succession
- Founders wait too long to start the succession process
- Founders believe that younger family members are not capable to take over the business
- Founders are unsure of how to start the succession process
- Founders’ advisors have no experience to assist with the succession process
- Founders concentrate on business issues and ignore family governance
- Family relationships are difficult to manage
The process of succession planning is much more successful if the founder or family leader has an idea of what their business, personal, and family goals are. I often ask my clients “do you have a one, three, and five year plan personally and for your business?” Most clients do not have a plan so I ask them to imagine what their perfect situation would be with work, family, and finances, then list out what their life would look like if everything went exactly how they dreamed it would. Once someone knows what they want, a strategic plan can be developed to achieve their ideal situation.
Succession planning typically includes the following elements:
- Objectives and goals defined for the business and the family
- Strategic planning for the business
- Business culture development
- Business governance and organizational hierarchy development
- Business leader development and training
- Family strategic planning
- Family vision, mission, and values developed or designed
- Family charters or constitutions for family governance
- Requirements for family member employees
- Addressing the need for and retention of key non-family member employees
In order to assist families in getting started on the succession planning process, CMP has developed a Succession Score Card. Please download this free tool or contact the professionals at Cook Martin Poulson to schedule a consultation for your family firm. The sooner the process of succession planning is started the more likely your family business will survive to the next generation.
If you want to read more about this topic, including passing down a family business, be sure to read our post entitled: Succession Planning for a Family Business: Should You Sell or Pass Down the Family Business?